PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
How much is a company with the word "Linux" in its name worth? According to Wun Chiou, the answer is about $24 million. That's how much his company, LinuxOne, with the proposed ticker symbol LINX, is expecting to reap from its coming initial public offering. The neat part is, this company is very little besides its name, ticker symbol, and a handful of press releases.
LinuxOne filed its prospectus last September, about a month after the shockingly successful debut of Red Hat (RHAT), the premier distributor of the upstart operating system called Linux, a nonproprietary offshoot of the long-established Unix software. Linux, if you haven't heard, is a free operating system that's owned collectively by the thousands of programmers who have made changes to it. Unlike the case with Microsoft's (MSFT) Windows, Linux' source code -- the programming at the heart of the system -- is open and free for anyone to look at and change, as long as they post those changes on the Internet so that anyone else can use them.
The hard part about trying to make money from Linux is figuring out how to make money from free software. Red Hat claims to have cleared that hurdle by becoming the dominant distributor of Linux -- with a 52% market share -- a position it can use to become a provider of services to companies that use the software. Other companies are trying to carve out a niche by creating customized Linux computers or by specializing in foreign-language versions of the software.
PALTRY SUM.
Then there's LinuxOne, which was incorporated in Nevada last April. According to its prospectus, it has 10 employees, including its CEO (Chiou), a chief financial officer, and a vice-president for marketing. The other employees are listed in the prospectus as software engineers, with salaries of between $60,000 and $80,000. Yet in another part of the document, the company says in 1999 it spent a total of $4,677 on software development through last Oct. 31. That's a paltry sum for a company that is trying to compete with the likes of Red Hat, Microsoft, IBM (IBM), and Sun Microsystems (SUNW).
Then there's the company's revenue: Zero. That's right, zero revenue and, of course, zero profits. The company claims that it distributes Linux. Yet when you go to its Web site, which is adorned with a cute logo and asks which version of Linux you want, all the links to FTP sites where you can download the software are dead. No products and no revenue but a fancy-looking Web site.
While it's not illegal, LinuxOne's prospectus is nearly a duplicate of Red Hat's
LinuxOne's prospectus raises other questions. One red flag is the section where it lists its board of directors. Normally, companies have 8 to 12 board members. But LinuxOne lists only one, by the name of Paul Kraus, who is an architect and the owner of a lithography shop, according to the prospectus. Are LinuxOne's financial statements audited? Yes, by a Reno (Nev.) CPA by the name of Mark Bailey, who runs his own firm. A member of a Big Five accounting firm he isn't.
Finally, note that most of LinuxOne's prospectus is almost a verbatim copy of Red Hat's. In place of the name Red Hat there's LinuxOne, and the financial tables have been changed. But to outward appearances, much of the rest of the document is a duplicate. The description of the company, the long list of risk factors, and even the accounting footnotes are identical in wording. The Securities & Exchange Commission says there's no copyright protection on documents filed with it, so copying the verbiage from another company's prospectus isn't illegal. "Our concern is that the information is accurate and complete," says SEC spokesman John Heine.
"VERY BIZARRE."
Nevertheless, copycat prospectuses aren't accepted practice in the investment banking community. Goldman Sachs, the underwriter for Red Hat's IPO, declined to comment on LinuxOne. But one lawyer who specializes in creating IPO prospectuses for investment banking clients is shocked by the similarity between Red Hat's prospectus and LinuxOne's "It's normal for there to be some degree of similarity between the S1's [the official term for an IPO prospectus] of companies in the same industry, but I've never heard of a verbatim copy before," says this lawyer, who requests anonymity. "There's nothing legally wrong with what they've done. It's just very bizarre."
Why have LinuxOne's founders bothered to create a company that is clearly a questionable investment? Because money can be made in anything that has the word Linux in it. Red Hat's stock climbed 403% on its opening day. VA Linux (LNUX), which sells computers that are supposed to be optimized for Linux, broke every record when its price increased by more than 1,000% before finishing its first day of trading with a 733% rise. Even if LinuxOne doesn't get that kind of boost, it will have made the company's original investors millionaires simply by selling its 3 million shares at the expected asking price of $8.25.
Says one Linux developer: "[LinuxOne will] hurt our chances at convincing people that this is a real operating system"
But chances are good that might not happen. There's plenty of anger about LinuxOne in the loose-knit but well-connected community of Linux developers. The new company is "trying to make a buck off of the Linux hype that is sweeping the stock market," says Bruce Perens, a leading Linux programmer and founder of his own Linux startup, Linux Capital Group. "It will only make the real Linux companies look bad and hurt our chances at convincing people that this is a real operating system."
Calls and e-mails to LinuxOne were forwarded to the company's legal counsel, who did not respond. Even if executives did reply, they couldn't legally comment much on the company's financial prospects because it is currently in the SEC-mandated "quiet period" that accompanies the registration process for an IPO. LinuxOne's offering is expected to take place sometime in January.
"A PLAY ON STUPIDITY."
Those in the investing community who have read LinuxOne's prospectus aren't in love with the company. "It's a play on the stupidity of people who buy IPOs on names alone," said Irv DeGraw, the director of research at WorldFinancenet.com, an IPO specialty research firm. "They're selling a Linux stock symbol."
If word gets around quickly enough, this IPO might not make it out of the starting gate, because investors will be aware of its sketchy business model and will turn away when the stock is offered to them by a cold-calling broker. Then again, with the frenzy of today's IPO market and with many investors trying desperately to get in on the next hot IPO, maybe LinuxOne will find enough customers to buy the only product it has: Its share certificates.
Jaffe writes about the markets for Business Week Online
Get BusinessWeek directly on your desktop with our RSS feeds.
Add BusinessWeek news to your Web site with our headline feed.
Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.
To subscribe online to BusinessWeek magazine, please click here.
Copyright 2000 , by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
